Quick answer
Using a second mortgage to pay an ATO debt can make sense when the debt is too large or urgent for a payment plan to handle comfortably, when clearing it unlocks a refinance, or when director penalty exposure is a concern. Since 1 July 2025, general interest charge on ATO debts is no longer tax deductible, which changes the comparison. A payment plan may still suit smaller debts the business can clear steadily from cash flow.
Key points
- GIC compounds daily and, from 1 July 2025, isn't tax deductible.
- Payment plans of $200,000 or less can often be set up online.
- Clearing the debt can unlock refinancing with a mainstream lender.
- Director penalties can make company tax debts personal.
- Borrowing still needs a clear exit; it moves the debt, it doesn't erase it.
Tax debts are one of the most common reasons business owners look at their property equity. They’re also one of the situations where the decision has changed recently, so it’s worth weighing carefully rather than reaching for whichever option feels quickest.
What changed on 1 July 2025?
Until mid-2025, the general interest charge (GIC) the ATO adds to overdue tax could generally be claimed as a deduction. That softened its cost. The ATO now confirms that taxpayers can no longer claim a deduction for GIC or shortfall interest charge (SIC) incurred on or after 1 July 2025, and that this applies regardless of which income year the underlying debt relates to.
In a June 2025 media release, the ATO suggested that taxpayers who can’t pay on time discuss their position with their accountant or finance provider to understand whether there are alternative ways of funding tax debts, and to talk through the tax implications with a registered tax agent. That’s a fair summary of the decision this page is about.
What does a payment plan offer?
An ATO payment plan lets you pay a debt in instalments. The ATO notes:
- If you owe $200,000 or less, you may be able to set one up through online services or the automated phone line.
- Debts on a payment plan continue to accrue GIC, which compounds daily.
- You need to keep up with new obligations in full and on time, or the plan can default.
- Tax refunds are generally offset against the debt.
For a modest debt the business can clear steadily from cash flow, a payment plan is often the simplest path and keeps property out of it entirely.
When might a second mortgage make more sense?
| Situation | Why property equity may help |
|---|---|
| The debt is large relative to monthly cash flow | Instalments would strain the business for too long |
| A mainstream refinance is blocked by the debt | Clearing it can unlock longer-term finance |
| Director penalty exposure is a concern | Paying the company liability reduces the parallel penalty |
| The ATO has escalated action | A single payment can resolve it |
| The plan keeps defaulting | A one-off clearance stops the cycle |
On director penalties: the ATO explains that the regime covers unpaid PAYG withholding, GST and super guarantee charge, and that if liabilities are reported more than three months late, the penalty can generally only be remitted by paying the company liability in full. If that applies to you, get advice quickly.
If one or more of these rows describes your situation, it may be worth asking a specialist what a second mortgage would look like. There’s no credit check when you first enquire.
How do you compare the two fairly?
- Get the real payoff figure from the ATO, including GIC to date.
- Estimate how long the payment plan would take at an instalment the business can genuinely afford.
- Estimate the GIC over that period, remembering it compounds daily and is no longer deductible.
- Get real pricing on a second mortgage, including fees, for the time you’d realistically hold it until the exit.
- Ask your accountant how each option is treated for tax, including whether interest on the second mortgage may be deductible as business borrowing.
- Factor in what clearing the debt unlocks, such as a refinance or removal of enforcement pressure.
Our guide to GIC and tax debt funding choices walks through this comparison in more detail.
What exit works for a tax-debt second mortgage?
Borrowing to pay the ATO moves the debt; it doesn’t remove it. The exit is what makes it sensible:
- Refinance with a mainstream lender once the ATO debt is cleared and returns are up to date. This is the most common exit.
- Sale of an asset, such as an investment property or equipment.
- Cash flow, if the business’s surplus can clear a smaller loan within a reasonable period.
Without an exit, a second mortgage for tax can simply swap one pressure for another. See planning the exit from day one.
A worked example (illustrative)
A company owes $240,000 to the ATO, mostly GST and PAYG withholding from a difficult year. It’s above the online self-service threshold, and the instalment the business could afford would take about three years. The bank has said it will refinance the company’s facilities once the ATO debt is cleared and the latest return is lodged. The directors own a home worth $1,300,000 with $480,000 owed.
A second mortgage of $240,000 would take combined LVR to about 55%, leaving a solid cushion. The exit is the bank refinance, expected within nine months. In this case borrowing may well be sensible. If the bank hadn’t committed, the decision would be much less clear-cut. Illustrative only.
What should you avoid?
- Borrowing to pay tax while new tax keeps going unpaid. Fix the cause, such as setting aside GST and PAYG each week.
- Borrowing more than the payoff figure “for breathing room” without a plan for the extra.
- Ignoring the ATO while you arrange finance. Keep talking to them.
Talk through your tax debt calmly
If an ATO debt is weighing on you, a short enquiry is a reasonable next step. One specialist will look at the debt, the property and your exit and tell you honestly whether a second mortgage, a payment plan or something else is the better fit. There’s no credit check to ask and your enquiry stays with one person. Please include the amount owed and any ATO arrangements accurately. It changes the advice.
Frequently asked questions
Is it better to use a payment plan or a second mortgage for an ATO debt?
It depends on the size of the debt, how quickly the business can repay it, the cost of each option and what else clearing the debt would unlock. A payment plan avoids a mortgage; a second mortgage can clear the debt in one step. Compare both with your accountant.
Is the ATO's interest charge tax deductible?
Not any more for charges incurred from 1 July 2025. The ATO confirms that general interest charge and shortfall interest charge incurred on or after that date are not deductible, regardless of which year the debt relates to.
Can the ATO set up a payment plan online?
The ATO says that if you owe $200,000 or less you may be able to set up a payment plan through online services or its automated phone service. Larger debts need direct contact.
Does paying the ATO debt remove director penalty risk?
Paying the underlying company liability reduces the corresponding director penalty, because they're parallel liabilities. Ask your accountant how it applies to your situation.
Will a lender consider me if I have an ATO debt?
Specialist property-secured lenders consider ATO debt case by case. The property, the equity cushion and a clear exit matter a great deal.